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Taxing Services Like Hair Salons Could Bring in Hundreds of Millions of Dollars

Illinois lags far behind our neighbors’ taxes in Indiana, Iowa, Kentucky, and Wisconsin—missing out on millions, even billions, of dollars in revenues.

After a shampoo, Jamie Harms has her hair blow dried by stylist Rhona Kane at Blowtique Salon in Chicago on Friday, August 10, 2012. (   Photo: Terrence Antonio James/Chicago Tribune

The latest news from the budget debate in Springfield is on the revenue side of the coin: the senate is proposing higher taxes on food and medicine, with the edge taken off by a half-percentage-point decline in the overall sales tax. It’s a substitute for the “opportunity tax,” the badly named and much-ridiculed business tax floated recently.

The tax expansion would also include more service taxes. It’s something that even Bruce Rauner has suggested as a partial but significant solution to the state’s revenue problems. And it’s something I’ve written about quite a bit, because he has a point.

Services make up a bigger percentage of what people spend their money on than they used to, and Illinois’s tax structure is poorly designed to accommodate that change (which is why Rauner has phrased it as “modernizing” the state’s tax code). In fact, the state has one of the narrowest bases, in terms of the service sector, than any state in the country.

This new push for more service taxes comes on the heels of a new report from the state’s Commission on Government Forecasting and Accountability, which calculated how much government revenues would increase if we taxed as many services as our immediate Midwestern neighbors, none of which have the reputation of being high-tax states. Their estimates range from taxing an additional six services to catch up to Kentucky, bringing in an additional $179 million per year in 2020 (the year when the tax would take full effect), to adding an additional 81 to match Iowa, which would bring in $1.2 billion. All their estimates are even higher if the state applied those taxes to business-to-business services instead of just consumer services.

I added up what would happen if you applied the top 15 revenue-generating taxes from this menu. And it’s quite a bit of money. (Below are projected annual revenues for each tax in 2020.)

That’s a total of $1.4 billion. (In 2011, COGFA calculated that if the state taxed all 168 service industries it didn’t already, it would bring in $4 to $8.5 billion a year.)

Those are the big pieces of the pie above. But smaller pieces, even seemingly insignificant ones, could be non-trivial sources.

So copying a tax on Turkish baths and reducing salons (and certain types of massage services—more colloquially, any health spas) from the Iowa state code, for example, would be enough to restore 2014 funding levels for Cure Violence, the demise of which has been suggested as a factor in Chicago’s increased homicide rate. A dating service tax would cover something like prosecutors and victims’ advocates specializing in domestic violence and sexual assault for a county. The legislature is focused on a picture that’s big, long, and fearsome, but even small taxes can buy significant things.

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